Tesco share price rises as much as two per cent after Morgan Stanley upgrades it to "overweight"

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Morgan Stanley upgraded Tesco (Source: Getty)

Tesco's share price rose as much as two per cent after its turnaround plan was given the thumbs-up by Morgan Stanley, which upgraded it to "overweight" from "equal weight" this morning.

The embattled retailer's ability to improve its profit margins is being underestimated by the market, according to analysts at the investment bank.

"We believe Tesco has sufficient firepower and self-help to improve meaningfully the competitiveness of its UK customer proposition," it said.

Having appointed a new boss, last year Tesco unveiled a dramatic turnaround plan, with a new pricing strategy and plans to sell off parts of the business as well as the closure of a number of stores.

However Morgan Stanley also warned Tesco's efforts to slash prices could fire up the current price war, which would be bad news for the supermarket.

"Our investment case could prove too optimistic should Tesco's investment in its customer proposition in the UK lead the whole industry into a full-blown price war," it said.

Credit agencies such as Moody's and Standard and Poor's remain unconvinced by the new measures, with both slashing their ratings of the supermarket to junk.

S&P said Tesco's turnaround plan did not go far enough in light of "the challenges the group faces in sustainably turning around its operations and materially improving its profitability in the highly competitive U.K. grocery market."